Nonprofit Resources

Fraud Happened. Now What?

Many churches expect fraud will never happen to them and are caught off guard when it does. Fundamentally, fraud is a symptom of the fallen human heart, so all churches are exposed to the risk. Even Jesus’s ministry was a victim of fraud (John 12:1-6). Unfortunately, the church has a long history of fraud as evidenced by biblical accounts, two thousand years of church history, and headlines in today’s news. Fraud can occur in any church.

Acknowledging this predicament is the first step to reducing the risks of fraud. You can do this both by developing strategies to prevent fraud and by developing a plan to respond to it if your church should ever become a victim.

If your church experiences a fraud incident, it is vital to take prompt, proactive, and appropriate steps. This article outlines practical actions and important questions to guide your response.

What to Do When Fraud is Suspected

If there are suspicions or allegations of fraud at your church, it’s essential to take the following steps:

• Notify the appropriate leaders in your church. If your church has a formalized whistleblower hotline and fraud response process, use it.
• Consult with your church’s attorney to ensure actions taken in response to allegations or suspicions are in line with legal guidelines.
• Determine the possible outcomes of a fraud investigation — termination of the employee, a fidelity bond insurance claim, legal action, or a combination of these. We recommend that church leaders consider possible outcomes before an allegation of fraud ever occurs, so that an objective starting point is already in place.
• Discreetly place the suspected employee on leave and limit his or her access to assets and systems.
• Develop a plan to investigate the issue based on the sophistication, scope, and estimated amount of the suspected fraud. Consider engaging a forensic investigator to lead the investigation.
• Execute and stick to the plan.
• Gather essential facts about the suspicions or allegations. (See the questions below.)
• Plan and conduct interviews with individuals deemed to have information helpful to the investigation (possibly the suspect, other employees, witnesses, etc.).
• Secure all items of evidence (both electronic and hard copy) and maintain a chain of custody in case legal action is initiated.
• If the suspect has confessed to fraud or if irrefutable evidence is obtained regarding the suspect, remove access to the church’s accounting system and assets. (Change passwords and locks, collect keys, remove check signing authority and access to bank accounts, etc.)
• Based on the results of the investigation, determine the appropriate action to take against the suspect. Consider established church policies and all parties involved: the congregation, staff, leadership, the perpetrator’s family, the community, and potential future employers of the suspect.
• Consider what improvements can be made to the church’s internal controls based on the findings of the investigation.
• Develop and execute a communication plan with key church stakeholders, as appropriate, based on the findings of the investigation.

Key Questions to Guide Your Response

The following questions will help you gain clarity and respond appropriately if there are suspicions or allegations of fraud at your church:

• Who among your church staff or membership knows of the suspicions or allegations? Who on the leadership team or board should be notified?
• Who will investigate the suspicious activity and follow up on allegations?
• What are your policies, and what outcomes may come from an investigation — termination of the employee, a fidelity bond insurance claim, legal action, or a combination of these?
• What transactions are suspicious, or what assets are missing?
• Who has, or had, access to the assets and the accounting system?
• Who is the suspect? Is there more than one?
• Has anyone confessed to committing fraud?
• Are any of the suspects known to be experiencing personal financial difficulties that could provide motivation, such as high debt, bankruptcy, or divorce?
• Have there been any observable behavioral or lifestyle changes among the suspects, such as addictions, living beyond their means, a new car, expensive vacations, or home improvements?
• What are the possible ways the suspect could have committed fraud?
• What access does (or did) the suspect have to assets and systems?
• How long has the suspect been employed at the church?
• What is the time period under suspicion?
• Have there been varying levels of access to assets and systems during that time, or have they been the same throughout?
• Are there any checks and balances in place at the church that would limit the amount of possible fraud committed?
• Can you estimate the amount of cash or the number of assets stolen?

Managing the Impact

One of the saddest realities of church fraud is the damage it inflicts on relationships. The perpetrator’s family is often shocked and humiliated and must endure the consequences of their loved one’s actions. Church leaders and members should consider ways they can support the families during this challenging time. A balance of justice and grace is needed.

At the same time, the trust between the congregation, the community, and church leadership is tested when fraud happens in the church. Fraud not only causes financial damage but threatens severe relational and reputational damage, depending on how well leadership responds. A balance of wisdom, transparency, and decisiveness is needed.

While you may expect that fraud will never happen in your church, you are most likely to respond appropriately and proactively if you develop a planned response you can use if it does.

CapinCrouse provides fraud and forensic accounting services specifically designed for churches and other nonprofit organizations. Please contact us to learn more and discuss how we can help you assess and reduce your church’s fraud risk and respond to allegations of fraud.

This article has been updated. 

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